Delaware Speaks on Confidentiality Agreements — First, Some Background

On May 11, I posted a link on our Facebook account to an article in The New York Times regarding a decision in Delaware Chancery Court earlier this month.

In that case (Martin Marietta Materials, Inc. v. Vulcan Materials Company), the court issued a very lengthy opinion (139 pages!) about a topic that is very common in Mergers & Acquisitions, private company purchases and sales, and a variety of related contexts where two companies, as a prelude and condition to engaging in negotiations about a merger, sale, exchange, venture or other business combination, or other fundamental or significant business or commercial transaction, enter into a confidentiality or nondisclosure agreement prior to or at the very early stages of their conversations.

Why?  Because neither is willing to commit to such a major transaction without  getting an open, unqualified look at the other during the course of due diligence and because neither can conduct thorough due diligence except on a fully cooperative basis with the counterparty, and neither will be that upfront with the other unless the privacy of its disclosures is assured.  And then there are the securities and corporate laws and fiduciary obligations of each company and its insiders to consider: a potential target is not advised to disgorge its own deepest secrets to a potential acquirer without some privacy protections, unless it doesn't worry about SEC investigations, compromising trade secrets, surrendering valuable proprietary or confidential business information (like customer lists, tenant rolls, and supplier pricing) to competitors, and welcoming a flood of lawsuits from its own shareholders for permitting the resulting damage to their company and the severe value decline in their stockholdings.

For at least 30 years, almost every potential acquisition of any magnitude has begun with a confidentiality or nondisclosure agreement (NDA) at its earliest stage.  Sometimes this is highly negotiated; other times it is presented unilaterally by the seller or target to potential suitors, who are more like bidders in a seller's market, as a "take it or leave it" precondition to preliminary negotiations.

The surprising fact is that while thousands upon thousands upon thousands of NDAs have been negotiated, exchanged, written about in treatises, and included in form books -- a former client of ours regularly entered into confidentiality agreements almost every business day for years regarding any potential acquisition or disposition of assets it had any interest in pursuing, so I can safely estimate that we have approximately one thousand examples of signed confidentiality agreements that we negotiated for just that client, and probably 500 or more for another client -- very , very few ever wound up in dispute resolution forums, and even fewer in court.   Anyone searching for judicial opinions involving contract breaches over leases, mineral interests, purchase or supply contracts, etc. can quickly find hundreds of reported cases, and it is that judicially made law that is our common law and that shapes much of our statutory laws.

But sue over a breach or alleged breach of an NDA in a merger and acquisition context?  Very rarely, and not just because some NDAs require that disputes be submitted to arbitration (to help preserve not only the privacy and secrecy of the matters that are the subject of the NDA but also to preserve the reputations of the parties and their insiders from the damage that might result from public awareness of the details of their negotiations, especially sloppiness and error).

So rarely do confidentiality agreement breach claims reach courtrooms, that clients often ask flatly what good confidentiality agreements are, because no one ever seems to sue for their breach!  It became a commonly accepted notion among those knowledgeable in the arena that the power of confidentiality agreements existed more as a moral obligation than a legal one: breach your duties, and word will travel quickly that you are not trustworthy, and the price you pay in the real world of dealmaking will be far more severe and far longer lasting than the punishment any court would deliver you.

So when the Court of Chancery in Delaware -- the most listened to court in the M&A world -- found itself facing a breach of confidentiality agreement claim in a business combination context, and the parties failed to settle the matter privately, the opportunity was there for us all to finally find out what happens whether and how a leading court will enforce an NDA.

In my next blog, I will discuss this particular decision; but to reinforce the opinion I expressed above that these kinds of disputes never wind up in court, I will tell you right now, that the key judicial decision cited by the Chancery Court of Delaware in the Martin Marietta - Vulcan decision was issued by ... A COURT IN ONTARIO, CANADA!


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